Banking (No. 2) Bill [HL]

My Lords, I am really delighted to have the opportunity to congratulate the noble Lord, Lord Smith of Kelvin, on a most excellent maiden speech. I find myself with much in common with the noble Lord: I am an accountant, no longer practising of course; I was the vice-chairman of the BBC and he was a governor after me; I have some interest in banks, in a modest way as an investor, unlike him as a director; and he seems to have a sense of humour, which I like to think I share too. He also comes from Scotland, and there is something I did in my past which bears some relationship that he will know about only too well. The noble Lord was also in the FSA, which I want to have a word about later. He was a chairman of a group on audit committees and produced a combined code of guidance. I assume it was all before we heard about toxic assets. I may later be a little critical of banks, auditors and the FSA, and I hope that the noble Lord will forgive me, as I am not being personal. We heard a most excellent maiden speech, and I hope that we will hear often from the noble Lord in the future, because he has a lot to offer to the House of Lords and to Parliament. I hope we will hear from him on many occasions. I agree with my noble friend Lord Myners on the Bill itself and the need for recapitalisation of the banks, which is fairly self-evident these days. My noble friend spoke often of the need for financial stability—with which I also agree—and used the words ““financial stability”” many times. He also spoke about the credit guarantee scheme. He told us that £100 billion—we do not use the word ““million”” anymore, and I assume that we will soon be talking only of trillions—had been taken up from the credit guarantee scheme. I am delighted to hear it because, as I understood it, the scheme had not been working too well because, I am told—not that I believe anything I read in the papers—the cost to its users was too high. Perhaps my noble friend will say a word about that and also tell us whether this borrowing—the capitalisation of £37 billion and £100 billion or possibly £250 billion in due course—will count against the £118 billion, the figure in the Pre-Budget Report that we are likely to see by next year. Clearly, those guarantees represent a lot of borrowing and I hope it will never happen, although the £37 billion will. Perhaps the Minister can tell us whether, as I assume, those are classed as investments. I declare a modest interest in banks, particularly the one of which the noble Lord, Lord Smith of Kelvin, was a director, the Royal Bank of Scotland, in which I took up a modest rights issue at 200p a share, not long before the Government paid 65p on behalf of taxpayers. I noticed that the reason given for choosing that price was not that there was any due diligence or sight of the balance sheet, but that they took an 8.5 per cent discount on the closing price of the shares on 10 October and then a further 1.5 per cent initial charge. Since then, we have learned rather more—although we still do not know enough—about toxic assets and we have heard of further losses which the Royal Bank of Scotland has had in recent weeks or months. I do not know whether that price was good or bad for taxpayers. I quote what my noble friend Lord Myners said to me in response to a Written Question about how toxic assets are to be valued now, which I am sure many of us will be interested to know. It is a complex Answer: "““Current accounting standards set out rules governing the disclosure of off-balance sheet transactions, where these are not required to be consolidated into group accounts. Similarly, current standards provide for recognition and classification of transactions involving derivatives””.—[Official Report, 12/11/08; cols. WA130.]" I shall leave it there. I am sure what the noble Lord was telling me will be clear to the House, although it may not be clear to everyone who takes even a slight interest in these matters. Did the current accounting rules come into effect before or after 10 October? When we chose that price, did my noble friend know about the off-balance sheet transactions and the figures in the affairs of the Royal Bank of Scotland? I turn to my right honourable friend the Chancellor and what he said about how the Government have a mind to manage the banks in their control, whether 100 per cent or where they have simply a majority holding. In his letter to John McFall, the chairman of the Treasury Select Committee in another place, the Chancellor said, "““the Government’s investments will be managed on a commercial basis by an arm's-length company””." I hope that that is a contradiction in terms as regards what the Government really have in mind. I hope that the talks with the banks now will be more than arm’s length—more twisting arms—but I do not know. It seems to me to be a contradiction in terms even if the banks sign up to some sort of code. The plain fact is that if they are to be run on a purely commercial basis by an arm’s-length company, which the Government are to set up, how on earth can we have any practical influence on how those banks will be managed in the future? I hope that my noble friend can tell us exactly what is going to happen. How will they tie the management down? There will be specific cases where the banks will have to decide on a commercial basis whether they should lend or not lend. What will we do? How will we ensure that they maintain certain levels of lending? We are told that they are going to stick to the 2007 lending levels. Surely that is meaningless because, if they are being run on a commercial basis, how can they stick to the particular level of lending of any year? When he replies, will the noble Lord tell us what this means? Bank lending is as crucial to getting out of this recession as any fiscal stimulus. Why, despite all that has been done and how much taxpayers’ money has been pumped into them, are the banks not lending? In our debate of 8 December, my noble friend Lord Myners told us that further write-offs of toxic assets are to be expected. How do we know what may be expected? Do we know the size of the toxic assets that are to be written off? It could be that the banks have a lot to write off and will simply balance their books with the money we are providing for them rather than lend it out, as the Government have in mind. I do not know. What I do know is that we have a situation where we are supposedly in control of the banks yet we are not because the relationship has to be kept at arm’s length and on a commercial basis. It does not make sense. Again, perhaps my noble friend will explain this more fully. If the banks still do not lend despite all the money we have given them, what is the Government’s strategy? Non-executive government directors are being appointed. We have had a lot of non-executive directors of banks, some earning up to £200,000 a year, but what were they doing while the banks were investing, off balance sheet, depositors’ money in all these toxic assets? Did those non-executive directors even know what was going on? Did they ask any questions? Now we are to have government non-executive directors, so perhaps my noble friend will tell us what they are expected to do. Whether the banks are publicly or privately owned, it is clear that we need stronger regulation, and I am delighted that the noble Lord, Lord Turner, the new chairman of the FSA, seems an able man, whom we have heard in this House and elsewhere. The FSA is now recruiting more people to help in its regulatory activities. My worry is who the authority will employ to do it—more ex-bankers or more accountants, perhaps? With respect to my own profession, we have had accountants who provided clean audit certificates, only to find a few days or weeks later that the banks were writing off vast amounts of toxic assets. How did they value those assets? Does anyone know? For auditors to qualify a set of accounts is a serious matter. If they had qualified the audit certificate of any bank or indeed any company, it is such a serious matter that it would be the end for the organisation. But it is probably even more serious not to have done so and to have let the banks carry on as they were. I do not know what accounting standards are going to be introduced, but we should note the way in which auditors were giving clean certificates to banks only to find shortly after doing so that vast assets were being written off the balance sheets. I should make it clear to my noble friend that my questions do not in any way seek to persuade the Government to avoid doing what the Bill seeks to do. The Government are right to introduce it and to do the recapitalisation—I want to see a sound banking system—but I am concerned to know how the Government propose to allow the same management that bought all the toxic assets to manage the banks, with everything at arm’s length. We are just talking to them and they still do not lend, so what are the Government now proposing? I wish to speak about one small part of the Bill rather than the detail, which we will come to in Committee: the special resolution regime, the SRR, in Part 1. My right honourable friend the Chancellor described it at Second Reading in the other place: "““Part 1 provides for a permanent special resolution regime that is at the heart of what is proposed. As hon. Members are aware, it will allow us to accelerate the transfer of … a bank’s business to a publicly controlled bridge bank, on the way to a private sector sale. It will also modify the insolvency procedure and allow us to take a bank into temporary public ownership””.—[Official Report, Commons, 14/10/08; col. 696.]" Could this accelerated transfer to public ownership be carried out not because the banks are insolvent or illiquid but simply because they are not doing the job that we expect them to do? If the Bill does not allow for that, can my noble friend assure us that we will be able to amend it so that it will do precisely that? I end by referring to a very cautious person, the Governor of the Bank of England. On 6 December Mervyn King said to the Treasury Select Committee: "““The banking system is too important just to be left to its own devices””." I do not know what he meant by that, but what meaning could it have other than that, if the banking system were left to its own devices, it would be disastrous for this country and the economy? Do the Government agree with the Governor of the Bank of England? If not, what else do they propose? I prefer not to go down the path the Governor implies in that statement but if the current system is not working—we are talking to the banks and they are still not lending—I hope my noble friend can assure us that the Government will not remain at arm’s length from those banks.